The conventional way of buying crypto in India is using the crypto exchanges such as WazirX, CoinDCX, and Zebpay.
What do these exchanges have in common?
They are centralized.
They require you to complete a KYC.
They report back to government officials on anything and everything.
Let’s say you sign up for WazirX, buy 1 ETH for $3,000, and one year later it becomes $7,000. WazirX now has to report back this transaction along with your personal information such as PAN to the IRS. Keep in mind, the bank you used to do this transaction already did that.
Now the IRS knows exactly how much you’ve gained regardless of where you keep this ETH. The transaction record shows you purchased 1 ETH for $3,000, which became $7,000. Now you’re technically required to pay an LTGC tax of 10% on the $4,000 gain. Plus, you still have to pay up to 30% income tax.
Unless you’re a CA, CFA, or someone with a pretty solid finance background, there’s not much you can do here to save tax on this crypto transaction.
And that’s a lot of taxes.
So, how do you save, or simply, do not pay any tax on your crypto gains?
I think I have a way that should be able to help you. But I’m not so sure if this is the right way to do it, or even if this would work at all. Maybe it’s a little greyish.
I’d like you to take part in a productive debate starting in the comment section if you have an opinion or more knowledge regarding this topic. I want to discuss various ways we can accomplish this goal.
Before moving on, there are two ways you can avoid paying tax on crypto gains.
- Buying Crypto from a decentralized exchange – your identity is unknown.
- P2P transactions in USDT, pool it with other addresses, and swap it on an anonymous wallet.
Let’s take a look at it my proposed method.
Step 1: Buy Stablecoins from a Crypto Exchange
Stablecoins are coins like USDT which derive their value from being bound with the U.S. Dollar. They are worth the same (fractional differences may occur) as the current dollar market price. All stablecoins are pegged to a commodity or an asset that provides the coins with their value.
As the name suggests, Stablecoins are, well, Stable. They aren’t nearly as volatile as other cryptocurrencies.
Think of Stablecoins as a representation of sovereign currencies, but using the blockchain ecosystem.
The USDT and BUSD Stablecoins keep in sync with USD market value.
You can buy USDT using any Fiat currency and move it to your personal crypto wallet. USDT can be traded for nearly every cryptocurrency or token you can think of.
Once you’ve purchased USDT or BUSD stablecoins, move on to the next step.
Step 2: Transfer The Stablecoins to Your Private, Non-Custodial Crypto Wallet
Now, this step is crucial. The USDT or BUSD stablecoins you just purchased from a centralized exchange need to be transferred to your private, non-custodial, COLD, hardware crypto wallet.
There’s a difference between custodial and non-custodial wallets. In a non-custodial wallet, you don’t have to disclose your identity and you own your private keys. They aren’t stored anywhere else. The app doesn’t link private keys to your identity nor keeps them in its database.
Whereas in a custodial wallet, you don’t have access to the private keys. You often need to sign up using an email address, create a username, disclose your identity, and more.
Simply put, don’t use a custodial wallet or software wallet.
Trust Wallet is a non-custodial software wallet, where a Coinbase wallet is a custodial software wallet.
Ledger Nano is a cold, hardware and con-custodial wallet.
What you need to use is a hardware wallet like Ledger or Trezor, bought using a cryptocurrency you purchase from any source apart from the centralized exchange like WazirX. We are trying to remove your trace from the hardware wallet.
So you need to buy a hardware wallet using a VPN, crypto purchased from a decentralized exchange like Uniswap and get it delivered to a post box address. It can’t be traced back to you.
* Alternate Method: Transfer it to a Decentralized Exchange
Instead of transferring it to a hard wallet, send the stable coins to a decentralized exchange.
The only decentralized exchange I’d recommend using is UniSwap or PancakeSwap. Because I use both of them (Pancake Swap more often since it connects with Trust Wallet), and others might be as good or even better than both of them, but I only recommend the tools that I use.
Step 3: Convert the Stablecoins to your Preferred Crypto
The next step is to convert the BUSD or USDT coins to your preferred crypto coin/token.
This is called swap. You trade one coin for the other at a fixed fee.
When you swap a coin using a non-custodial wallet, you are trading a non-volatile coin like USDT for a highly rewarding coin like ETH without disclosing your identity.
Of course, since the transaction is happening on the blockchain, we can trace the transaction to your original exchange wallet.
However, once you swap the USDT (stablecoin) with ETH (altcoin) – there’s no way to link that address to you.
Plus, the exchange you bought the stablecoins from has to report the transaction that happened while you’re using their platform. They report your USDT or BUSD transaction which doesn’t move by 50% in a year.
What you do with your coins after you’ve moved them out of the exchange wallet is not a concern of the IRS. At least for now, until we see the regulation in action, this is a presumption I’ve taken.
In my case, when DOGE hit an all-time high, I only sold about 15% of Dogecoins. Rest I converted into ETH and SOL. Again, there’s no way to prove this. I can show you an image, but I won’t. Okay, just one:
However, no need to flaunt your crypto investment.
Rule number one of crypto investing – privacy.
The officials don’t’ have the time, resources, or any other motive to track each wallet and the movement of funds in each of them.
Unless you give them a good reason, too. So pay your taxes on time, with all due diligence, and make sure you’re reporting your income accurately.
This is a simple way I believe you can avoid paying capital gains, but I’m not sure if this makes sense since you can always trace back the transactions on the blockchain. That’s the beauty of decentralized finance.
There’s simply no way to hide your transaction without a trace. However, you can deny possession of the wallet address where the chain ends.
One more way to save tax on crypto gains is using NFT. I don’t believe in NFTs, but then I dig a little deeper and find out one of the reasons they were getting so popular, especially with people who’ve large followings and miners.
With a bunch of your own NFT collections and a little bit of price adjustment, you can literally write off the taxes on these purchases. I’m not going to write about it here, since NFTs are literally useless pieces of code and make a mockery out of the whole crypto ecosystem. You can read more about it by searching online forums.
I’m not sure how it’s going to be considered by the IRS/Government of India. Since the government’s position on crypto isn’t clear. Should it be taxed, regulated, controlled, banned, – nothing is conclusive yet.
So you should make up your own mind before following this process. Always do your own due diligence before you take a step financially.
That’s all. I hope you found this tutorial helpful.
If you’ve any questions let me know in the comments.
Disclaimer – I’m not a financial advisor, nor is this financial advice. Please consult your CA before filing tax. Tax theft is a serious offense and in no way shape or form do we advise anyone to conceive of their financials to avoid paying tax. This is an educational and purely informational article.